Euro Won’t Win Either Way Now

By Nicholas Hastings

Mario Draghi’s chances of saving the euro from a weak future have just run out.

When he speaks after the European Central Bank meeting on Thursday, the world’s financial community will be hanging on his every word.

Can the ECB president finally, at virtually the eleventh hour, come up with a bond-buying program that will save Spain and Italy from defaulting on their debt?

If he doesn’t, the global investment community will be sorely disappointed and the single currency will come under fresh selling pressure as the future of the euro zone as we know it is thrown into doubt.

But even if Mr. Draghi does come up with the bond buying goods, the euro’s reaction may not be that positive.

Sure, there will doubtlessly be a knee-jerk rally if Mr. Draghi can convince financial markets that the ECB will be buying bonds in amounts that will bring down and keep down the borrowing costs of Italy and Spain at both the short and long end of the bond market.

However, the rally won’t last long as financial markets start to focus on the ECB itself and, more importantly, the loss of the Bundesbank’s influence.

Ever since the ECB was launched in 1999 to conduct the monetary policy of the euro, the German central bank has been keen to ensure that it sticks to the same strict anti-inflation policies that the Bundesbank itself once pursued so successfully.

Keeping monetary policy as tight as possible had ensured that the Bundesbank delivered price stability and provided Germany with a strong currency in the Deutschmark.

Up until last autumn, the Bundesbank’s influence on the ECB was strong. Despite the debt crisis the bank’s provision of monetary easing remained circumspect and a far cry from the large doses of liquidity that were being supplied by central banks to the world’s other major economies.

However, this started to change when Mr. Draghi took over the helm of the ECB in October last year by introducing methods of providing liquidity to euro zone banks.

With the crisis still deteriorating, Mr. Draghi came up with more drastic proposals earlier this summer to help drive the borrowing costs of key debtors, such as Spain and Italy, lower.

Although German politicians, including Chancellor Angela Merkel herself, have remained relatively agnostic to the ECB’s plans, the Bundesbank hasn’t. Bundesbank President Jens Weidmann has repeatedly made his objections to the bond-buying program very clear.

Over the last few days, it has emerged that Mr. Draghi might be curbing his bond-buying plans to just the short end of the curve in order to accommodate Bundesbank concerns.

Nonetheless, if the ECB president announced Thursday a full scale plan that pours nearly unlimited amounts of money into the euro zone’s financial system as a way of stopping the debt crisis from escalating any further, the move will be seen as the end of an ECB run along the strict monetary lines of the German central bank.

And the euro itself will no longer been as a currency that will emulate the strength of the Deutschmark as many had initially hoped.

Comments (1 of 1)

how can he talk before september 12,german answer about ECB...Bying bonds or not EU is to fragile now,to weak,to poor,to hungry....and is to late now to save it....because suppose to happen 3 months ago feeding al with paper money...but now in the next months of winter will all collapse,busineses will not need money